Impairment IAS 36

 Impairment of assets is designed to ensure that an asset’s carrying amount does

not exceed its recoverable amount.
 The carrying amount of an asset should reflect the economic benefits an entity
expects that asset to produce.
 There are only two options for an asset: disposal or continue use the asset.
 Disposal – The net amount that we could obtain from the disposal – fair value less
cost of disposal
 Continue usage – The amount expected from continuing to using the asset – value
in use.
 The carrying amount should be assessed against the recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs of disposal and
value in use.
 Example 1
Office equipment is depreciated at 15% on the straight-line method. Office
equipment was purchased on 30 June 2011 at a cost of R175 000. On 31 December
2012, the directors determined that the value of the office equipment was impaired
and they obtained the following information:
The value in use of the office equipment was correctly calculated at R40 000.
The office equipment can be sold at R55 000 less selling cost of R5 000.
There were no other additions or disposal of office equipment during the year ended
31 December 2012.
REQUIRED
Prepare and disclose the property, plant and equipment note in the financial
statements of Spirit Limited as at 31 December 2012 in accordance with
International Financial Reporting Standards and the Companies Act of 2008.
 Solution to example 1
The carrying value of the asset at the beginning of 2012.
R175 000 – (R175 000*15%*6/12) = R161 875.
The depreciation for 2012 = R175 000*15% = R26 250.
The carrying amount at 31/12/2012 is R161 875 – R26 250 = R135 625.
The recoverable amount is the higher of asset’s :
Fair value less costs of disposal (R55 000 – R5 000) = R50 000.
Value in use R40 000.
The recoverable amount is R50 000.
The impairment loss = R135 625 – R50 000 = R85 625.
Accumulated depreciation – end of 2012
= R13 125 + R26 250 + R85 625 = R125 000.
 Property, plant and equipment note

Office
Equipment
R
Carrying amount at beginning of year 161 875
Gross carrying amount (at cost) 175 000
Accumulated depreciation (13 125)
Depreciation (26 250)
Revaluation 0
Additions 0
Impairment loss (85 625)
Carrying amount at end of year 50 000
Gross carrying amount (at valuation / cost) 175 000
Accumulated depreciation and impairment loss (125 000)
 Example 2

The company bought a motor vehicle for R450 000 on 1 January 2011. The motor
vehicle has a 3 years’ useful life using the straight-line method. On 1 January 2012,
the recoverable amount was based on fair value of the motor vehicle of R90 000
and calculated value in use was R100 000. The motor vehicle has not been
revaluated or impaired in previous years.

REQUIRED

Prepare and disclose the property, plant and equipment note in the financial
statements of Jim Limited as at 31 December 2012 in accordance with International
Financial Reporting Standards and the Companies Act of 2008.
 Solution to example 2

The carrying value of the asset at the beginning of 2012.

R450 000 – (R450 000/3 years) = R300 000.
The recoverable amount is the higher of asset’s :
Fair value less costs of disposal = R90 000.
Value in use R100 000.
The recoverable amount is R100 000.
The impairment loss = R300 000 – R100 000 = R200 000.
The new carrying amount at the beginning of 2012
= R300 000 – R200 000 impairment loss = R100 000
The depreciation for 2012 = R100 000/2 years = R50 000.
The carrying amount at 31/12/2012 is R100 000 – R50 000 = R50 000.
Accumulated depreciation – end of 2012
= R150 000 + R50 000 + R200 000 = R400 000.
 Property, plant and equipment note

Motor
Vehicle
R
Carrying amount at beginning of year 300 000
Gross carrying amount (at cost) 450 000
Accumulated depreciation (150 000)
Depreciation (50 000)
Impairment loss (200 000)
Disposal 0
Carrying amount at end of year 50 000
Gross carrying amount (at valuation / cost) 450 000
Accumulated depreciation and impairment loss (400 000)